RPX Corporation
RPX Corp (Form: 10-Q, Received: 08/03/2017 14:47:09)
Table of Contents

UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
————————————————
FORM 10-Q
————————————————
x QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended June 30, 2017
or
¨ TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
            
For the transition period from _____to_____       
Commission File Number: 001-35146
————————————————
RPXLOGOA22.JPG
RPX Corporation

(Exact Name of Registrant as Specified in Its Charter)
————————————————
 
Delaware
(State or Other Jurisdiction of Incorporation or Organization)
One Market Plaza, Suite 1100
San Francisco, California 94105
(Address of Principal Executive Offices and Zip Code)
26-2990113
(I.R.S. Employer Identification No.)
 
 
 

(866) 779-7641
(Registrant's telephone number, including area code)
 
 
————————————————
Indicate by check mark whether the registrant: (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.   YES  x     NO ¨  
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§ 232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).    YES  x     NO ¨  
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See the definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act.
Large accelerated filer
 
o
 
Accelerated filer
 
x
Non-accelerated filer
 
o
(Do not check if a smaller reporting company)
Smaller reporting company
 
o
 
 
 
 
 
 
 
 
Indicate by check mark whether the registrant is an emerging growth company as defined in Rule 405 of the Securities Act of 1933 (§230.405 of this chapter) or Rule 12b-2 of the Securities Exchange Act of 1934 (§240.12b-2 of this chapter).
o
Emerging growth company
o
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. 
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).   YES   ¨     NO   x
There were 49,500,188 shares of the registrant’s common stock issued and outstanding as of July 28, 2017.


Table of Contents

RPX Corporation
Form 10-Q Quarterly Report
————————————————
TABLE OF CONTENTS
 
 
 
  
 
Page
 
 
 
 
Item 1.
 
 
 
 
 
 
Item 2.
Item 3.
Item 4.
 
 
 
 
 
 
 
Item 1.
Item 1A.
Item 2.
Item 3.
Item 4.
Item 5.
Item 6.
 




Table of Contents

PART I. FINANCIAL INFORMATION

Item1.
Financial Statements (unaudited)

RPX Corporation
Condensed Consolidated Balance Sheets
(in thousands)
(unaudited)
 
 
June 30,
2017
 
December 31,
2016
Assets
 
 
 
 
Current assets:
 
 
 
 
Cash and cash equivalents
 
$
189,270

 
$
100,111

Short-term investments
 
55,271

 
90,877

Restricted cash
 
1,102

 
500

Accounts receivable, net
 
38,567

 
64,395

Prepaid expenses and other current assets
 
13,935

 
4,524

Total current assets
 
298,145

 
260,407

Patent assets, net
 
175,009

 
212,999

Property and equipment, net
 
6,294

 
6,948

Intangible assets, net
 
52,518

 
56,050

Goodwill
 
156,337

 
151,322

Restricted cash, less current portion
 
965

 
965

Deferred tax assets
 
34,042

 
38,261

Other assets
 
10,326

 
8,337

Total assets
 
$
733,636

 
$
735,289

Liabilities and stockholders’ equity
 
 
 
 
Current liabilities:
 
 
 
 
Accounts payable
 
$
2,468

 
$
3,197

Accrued liabilities
 
13,905

 
16,798

Deferred revenue
 
108,334

 
118,856

Current portion of long-term debt
 
7,724

 
6,474

Other current liabilities
 
1,008

 
1,484

Total current liabilities
 
133,439

 
146,809

Deferred revenue, less current portion
 
6,227

 
11,552

Deferred tax liabilities
 
3,830

 
4,023

Long-term debt, less current portion
 
83,935

 
88,110

Other liabilities
 
10,486

 
10,514

Total liabilities
 
237,917

 
261,008

Commitments and contingencies (Note 12)
 

 

Stockholders’ equity:
 
 
 
 
Common stock
 
5

 
5

Additional paid-in capital
 
371,566

 
360,462

Retained earnings
 
134,730

 
130,249

Accumulated other comprehensive loss
 
(10,582
)
 
(16,435
)
Total stockholders’ equity
 
495,719

 
474,281

Total liabilities and stockholders’ equity
 
$
733,636

 
$
735,289


The accompanying notes are an integral part of these condensed consolidated financial statements.

1

Table of Contents

RPX Corporation
Condensed Consolidated Statements of Operations
(in thousands, except per share data)
(unaudited)

 
 
Three Months Ended June 30,
 
Six Months Ended June 30,
 
 
2017
 
2016
 
2017
 
2016
Revenue
 
$
80,434

 
$
83,109

 
$
162,946

 
$
162,844

Cost of revenue
 
51,142

 
49,070

 
102,440

 
96,736

Selling, general and administrative expenses
 
23,124

 
25,904

 
44,245

 
52,799

Operating income
 
6,168

 
8,135

 
16,261

 
13,309

Interest and other income (expense), net:
 
 
 
 
 
 
 
 
Interest income
 
257

 
102

 
422

 
186

Interest expense
 
(949
)
 
(883
)
 
(1,857
)
 
(1,233
)
Other income (expense), net
 
1,119

 
(768
)
 
1,329

 
1,303

Total interest and other income (expense), net
 
427

 
(1,549
)
 
(106
)
 
256

Income before provision for income taxes
 
6,595

 
6,586

 
16,155

 
13,565

Provision for income taxes
 
2,403

 
2,436

 
5,970

 
5,178

Net income
 
$
4,192

 
$
4,150

 
$
10,185

 
$
8,387

 
 
 
 
 
 
 
 
 
Net income per share:
 
 
 
 
 
 
 
 
Basic
 
$
0.09

 
$
0.08

 
$
0.21

 
$
0.16

Diluted
 
$
0.08

 
$
0.08

 
$
0.20

 
$
0.16

Weighted-average shares used in computing net income per share:
 
 
 
 
 
 
 
 
Basic
 
49,142

 
51,034

 
48,910

 
51,548

Diluted
 
50,107

 
51,557

 
49,690

 
52,089


The accompanying notes are an integral part of these condensed consolidated financial statements.

2

Table of Contents

RPX Corporation
Condensed Consolidated Statements of Comprehensive Income (Loss)
(in thousands)
(unaudited)

 
Three Months Ended June 30,
 
Six Months Ended June 30,
 
2017
 
2016
 
2017
 
2016
Net income
$
4,192

 
$
4,150

 
$
10,185

 
$
8,387

Other comprehensive income (loss), net of tax:
 
 
 
 
 
 
 
Unrealized holding gains on available-for-sale securities arising during the period, net of tax
84

 
96

 
135

 
247

Foreign currency translation adjustments
4,791

 
(7,411
)
 
5,718

 
(6,480
)
Comprehensive income (loss)
$
9,067

 
$
(3,165
)
 
$
16,038

 
$
2,154


The accompanying notes are an integral part of these condensed consolidated financial statements.

3

Table of Contents

RPX Corporation
Condensed Consolidated Statements of Cash Flows
(in thousands)
(unaudited)
 
Six Months Ended June 30,
 
2017
 
2016
Operating activities
 
 
 
Net income
$
10,185

 
$
8,387

Adjustments to reconcile net income to net cash provided by operating activities:
 
 
 
Depreciation and amortization
85,855

 
85,585

Stock-based compensation
7,077

 
9,828

Excess tax benefit from stock-based compensation

 
(33
)
Amortization of premium on investments
890

 
972

Deferred income taxes
4,299

 
198

Unrealized foreign currency (gain) loss
(1,047
)
 
1,213

Fair value adjustments on deferred payment obligation

 
(1,920
)
Gain on extinguishment of deferred payment obligation

 
(463
)
Realized loss on exchange of short-term investments

 
290

Other
43

 
169

Changes in assets and liabilities, net of business acquired:
 
 
 
Accounts receivable
26,761

 
(15,207
)
Prepaid expenses and other assets
(11,342
)
 
(1,281
)
Accounts payable
(961
)
 
211

Accrued and other liabilities
(3,015
)
 
(6,097
)
Deferred revenue
(15,847
)
 
7,379

Net cash provided by operating activities
102,898

 
89,231

Investing activities
 
 
 
Purchases of investments
(25,071
)
 
(31,150
)
Maturities of investments
59,820

 
42,393

Sales of investments

 
145,925

Business acquisition, net of cash acquired

 
(228,453
)
Decrease (increase) in restricted cash
(602
)
 
225

Purchases of property and equipment
(730
)
 
(2,087
)
Acquisitions of patent assets
(41,918
)
 
(36,546
)
Net cash used in investing activities
(8,501
)
 
(109,693
)
Financing activities
 
 
 
Proceeds from issuance of term debt

 
100,000

Payment of debt issuance costs

 
(2,003
)
Repayment of principal on term debt
(3,125
)
 
(1,250
)
Proceeds from exercise of stock options
5,894

 
247

Taxes paid related to net-share settlements of restricted stock units
(3,291
)
 
(2,048
)
Excess tax benefit from stock-based compensation

 
33

Payments of capital leases
(209
)
 
(236
)
Repurchase of common stock
(4,783
)
 
(39,072
)
Net cash provided by (used in) financing activities
(5,514
)
 
55,671

Foreign-currency effect on cash and cash equivalents
276

 
(152
)
Net increase in cash and cash equivalents
89,159

 
35,057

Cash and cash equivalents at beginning of period
100,111

 
94,983

Cash and cash equivalents at end of period
$
189,270

 
$
130,040

 
 
 
 
Non-cash investing and financing activities
 
 
 
Change in patent assets purchased and accrued but not paid
$
333

 
$
(233
)
Change in fixed assets purchased and accrued but not paid
$
(166
)
 
$
158

Patent assets received in barter transactions
$

 
$
381


The accompanying notes are an integral part of these condensed consolidated financial statements.


4

Table of Contents


RPX Corporation
Notes to Condensed Consolidated Financial Statements
(unaudited)

1.
Nature of Business
RPX Corporation (also referred to herein as “RPX” or the “Company”) helps companies reduce patent litigation risk and corporate legal expense through two primary service offerings: its patent risk management services and its discovery services.

The Company's patent risk management services help companies reduce patent-related risk and expense through subscription-based patent risk management services that facilitate more efficient exchanges of value between owners and users of patents compared to transactions driven by actual or threatened litigation. The Company’s patent risk management membership clients pay an annual subscription fee and in return, receive access to substantially all of the Company's patent portfolio as well as an array of services provided throughout their membership. Access to these services is available primarily through discussions with the Company's professionals—particularly client relations and its team of patent experts, as well as through a proprietary database, and attendance at periodic conferences.

In addition to its subscription-based patent risk management services, the Company underwrites patent infringement liability insurance policies to insure against certain costs of litigation. The Company uses a reinsurance subsidiary company to assume a portion of the underwriting risk on the insurance policies that the Company issues on behalf of a Lloyd's of London underwriting syndicate. To date, the effect of the insurance policies that the Company has issued or assumed through its reinsurance business has not been material to the Company’s results of operations, financial condition or cash flows.

In January 2016, the Company acquired Inventus Solutions, Inc. ("Inventus"), now a wholly owned subsidiary of the Company, and began offering its discovery services, which consist of technology-enabled services to assist law firms and corporate legal departments manage costs and risks related to the litigation discovery process. The Company's discovery services include data hosting and backup, data processing and collection, project management, document review, and traditional document production. All of these services are designed to streamline the administration of litigation, investigations, and regulatory compliance.
2.
Basis of Presentation and Significant Accounting Policies
Basis of Presentation
The accompanying condensed consolidated balance sheet as of June 30, 2017 , the condensed consolidated statements of
operations and the condensed consolidated statements of comprehensive income (loss) for the three and six months ended June 30, 2017 and 2016 , and the condensed consolidated statements of cash flows for the six months ended June 30, 2017 and 2016 , are unaudited. The condensed consolidated balance sheet as of December 31, 2016 was derived from the audited consolidated financial statements which are included in the Company’s Annual Report on Form 10-K for the fiscal year ended December 31, 2016 , which was filed with the U.S. Securities and Exchange Commission (“SEC”) on February 28, 2017. The unaudited condensed consolidated financial statements should be read in conjunction with the audited financial statements and accompanying notes included in the Company’s Annual Report on Form 10-K for the year ended December 31, 2016 .

The accompanying unaudited condensed consolidated financial statements of the Company have been prepared in accordance with accounting principles generally accepted in the United States of America and with the instructions for Form 10-Q and Regulation S-X for interim financial statements. Accordingly, they do not include all of the information and notes required for complete financial statements. In the opinion of management, all adjustments, consisting of normal recurring items, necessary to state fairly the results of the interim periods have been included in the accompanying financial statements. Operating results for the three or six months ended June 30, 2017 are not necessarily indicative of the results that may be expected for any subsequent interim period or for the year ending December 31, 2017 .

Significant Accounting Policies
There have been no material changes to the Company’s significant accounting policies during the six  months ended  June 30, 2017 , as compared to the significant accounting policies presented under the heading “Basis of Presentation and Significant Accounting Policies” in Note 2 of the Notes to Consolidated Financial Statements in Part II, Item 8 of the Company’s Annual Report on Form 10-K filed with the SEC on February 28, 2017.

In March 2016, the Financial Accounting Standards Board ("FASB") issued Accounting Standards Update ("ASU") No. 2016-09,  Compensation – Stock Compensation (Topic 718)  ("ASU 2016-09"). ASU 2016-09 identifies areas for simplification involving several aspects of accounting for share-based payment transactions, including the income tax consequences, classification of awards as either equity or liabilities, an option to recognize gross stock compensation expense with actual forfeitures recognized as they occur, as well as certain classifications on the statement of cash flows. The amendments in this

5


update became effective in the first quarter of 2017. The Company adopted this standard on January 1, 2017 and the standard did not have a material impact on its consolidated financial statements.

Recent Accounting Pronouncements
In May 2017, the FASB issued ASU 2017-09,  Compensation-Stock Compensation (Topic 718): Scope of Modification Accounting ("ASU 2017-09") which clarifies the changes to terms or conditions of a share-based payment award that require an entity to apply modification accounting. ASU 2017-09 is effective for annual reporting periods, and interim periods therein, beginning after December 15, 2017. Early application is permitted and prospective application is required. The Company is currently evaluating impact of this guidance on its consolidated financial statements.

In March 2017, the FASB issued ASU No. 2017-08,  Receivables - Nonrefundable Fees and Other Costs (Subtopic 310-20): Premium Amortization on Purchased Callable Debt Securities  (“ASU 2017-08”), which shortens the amortization period for certain callable debt securities held at a premium. Specifically, the amendments require the premium to be amortized to the earliest call date. The amendments do not require an accounting change for securities held at a discount; the discount continues to be amortized to maturity. For public entities, ASU 2017-08 is effective for fiscal years beginning after December 15, 2018, and interim periods within those fiscal years. The Company does not expect the adoption of this guidance to have a material impact on its consolidated financial statements.

In February 2017, the FASB issued ASU No. 2017-05, Other Income - Gains and Losses from the Derecognition of Nonfinancial Assets: Clarifying the Scope of Asset Derecognition Guidance and Accounting for Partial Sales of Nonfinancial Assets . This ASU was issued to clarify the scope of the previous standard and to add guidance for partial sales of nonfinancial assets and is effective for fiscal years and interim periods within those years beginning after December 15, 2017. The Company does not expect the adoption of this guidance to have a material impact on its consolidated financial statements.

In January 2017, the FASB issued ASU No. 2017-04, Intangibles - Goodwill and Other: Simplifying the Test for Goodwill Impairment, which simplifies the subsequent measurement of goodwill and eliminates the two-step goodwill impairment test. Under the new guidance, an annual or interim goodwill impairment test is performed by comparing the fair value of a reporting unit with its carrying amount, and an impairment charge is recognized for the amount by which the carrying amount exceeds the reporting unit’s fair value. The amendment also eliminates the requirements for any reporting unit with a zero or negative carrying amount to perform a qualitative assessment and two-step goodwill impairment test. The ASU is effective prospectively for fiscal years and interim periods within those years beginning after December 15, 2019. Early adoption is permitted for interim or annual goodwill impairment tests performed on testing dates after January 1, 2017. The Company will early adopt this ASU for goodwill impairment tests beginning in 2017.

In January 2017, the FASB issued ASU No. 2017-01, Business Combinations: Clarifying the Definition of a Business, which provides a more robust framework to use in determining when a set of assets and activities is a business. This ASU is effective prospectively for fiscal years and interim periods within those years beginning after December 15, 2017. The Company will apply this guidance to applicable transactions after the adoption date.

In May 2014, the FASB issued ASU 2014-09,  Revenue from Contracts with Customers (Topic 606) , as well as associated ASUs 2016-08, 2016-10, 2016-12, and 2016-20 (the foregoing ASUs collectively, "Topic 606"), which will supersede most existing revenue recognition guidance in U.S. GAAP. Topic 606 becomes effective for annual and interim periods beginning after December 15, 2017; early adoption is permitted for annual and interim periods beginning after December 15, 2016. The Company plans to adopt Topic 606 on January 1, 2018, using the full retrospective method of adoption. The Company is currently assessing all potential impacts of the standard, however, based on its initial assessment, this standard will likely have a material effect on its consolidated financial statements due to the identification of multiple performance obligations for fees received from its patent risk management membership subscription and the timing of recognition for these potentially separable performance obligations. Specifically, the Company expects to recognize a separate performance obligation for certain discrete patent assets transferred to its membership clients and expects to recognize this revenue at a point in time. Under existing U.S. GAAP, the Company generally recognizes the membership fees ratably on a gross basis over the term of the customer contract. To the extent that separate performance obligations are identified, the Company will assess these to determine whether revenue should be recognized on a gross or net basis under Topic 606, which may result in revenue which is recognized on a gross basis under current U.S. GAAP to be recognized on a net basis, and vice versa. Therefore, the adoption of Topic 606 may increase the variability of the revenue recognized from these fees from period to period. Additionally, based on the Company's initial assessment, it does not expect Topic 606 to have a material impact on its discovery services segment.

6


3.
Net Income Per Share
Basic and diluted net income per share are computed by dividing net income by the weighted-average number of shares of common stock outstanding during the period. Diluted net income per share is computed by using the weighted-average number of shares of common stock outstanding during the period, including potentially dilutive shares. Potentially dilutive shares include outstanding stock options and restricted stock units ("RSUs"). The dilutive effect of potentially dilutive shares is reflected in diluted earnings per share by application of the treasury stock method. Under the treasury stock method, an increase in the fair value of the Company's common stock can result in a greater dilutive effect from potentially dilutive shares.

The following table presents the calculation of basic and diluted net income per share (in thousands, except per share data):
 
Three Months Ended June 30,
 
Six Months Ended June 30,
 
2017
 
2016
 
2017
 
2016
Numerator:
 
 
 
 
 
 
 
Net income
$
4,192

 
$
4,150

 
$
10,185

 
$
8,387

Denominator:
 
 
 
 
 
 
 
Basic shares:
 
 
 
 
 
 
 
Weighted-average shares used in computing basic net income per share
49,142

 
51,034

 
48,910

 
51,548

Diluted shares:
 
 
 
 
 
 
 
Weighted-average shares used in computing basic net income per share
49,142

 
51,034

 
48,910

 
51,548

Dilutive effect of stock options and restricted stock units using the treasury-stock method
965

 
523

 
780

 
541

Weighted-average shares used in computing diluted net income per share
50,107

 
51,557

 
49,690

 
52,089

Net income per share:
 
 
 
 
 
 
 
Basic
$
0.09

 
$
0.08

 
$
0.21

 
$
0.16

Diluted
$
0.08

 
$
0.08

 
$
0.20

 
$
0.16


The following securities were not included in the calculation of diluted shares outstanding as the effect would have been anti-dilutive (in thousands):
 
Three Months Ended June 30,
 
Six Months Ended June 30,
 
2017
 
2016
 
2017
 
2016
Outstanding weighted-average:
 
 
 
 
 
 
 
Stock options
685

 
803

 
702

 
804

Restricted stock units
96

 
2,838

 
741

 
2,714


7


4.     Financial Instruments
The following tables present the Company's financial assets and liabilities measured at fair value on a recurring basis (in thousands):
 
June 30, 2017
 
Amortized Cost
 
Unrealized
 
Estimated Fair Value
 
Level 1
 
Level 2
 
Level 3
 
 
Gains
 
Losses
 
 
 
 
Cash equivalents:
 
 
 
 
 
 
 
 
 
 
 
 
 
Commercial paper
$
27,385

 
$

 
$

 
$
27,385

 
$

 
$
27,385

 
$

Corporate bonds
905

 

 

 
905

 

 
905

 

Money market funds
35,112

 

 

 
35,112

 
35,112

 

 

Municipal bonds
7,759

 

 

 
7,759

 

 
7,759

 

U.S. government and agency securities
23,245

 

 

 
23,245

 

 
23,245

 

 
$
94,406

 
$

 
$

 
$
94,406

 
$
35,112

 
$
59,294

 
$

Short-term investments:
 
 
 
 
 
 
 
 
 
 
 
 
 
Commercial paper
$
3,984

 
$

 
$

 
$
3,984

 
$

 
$
3,984

 
$

Corporate bonds
6,977

 

 
(7
)
 
6,970

 

 
6,970

 

Municipal bonds
34,648

 
4

 
(10
)
 
34,642

 

 
34,642

 

U.S. government and agency securities
9,681

 

 
(6
)
 
9,675

 

 
9,675

 

 
$
55,290

 
$
4

 
$
(23
)
 
$
55,271

 
$

 
$
55,271

 
$

 
December 31, 2016
 
Amortized Cost
 
Unrealized
 
Estimated Fair Value
 
Level 1
 
Level 2
 
Level 3
 
 
Gains
 
Losses
 
 
 
 
Cash equivalents:
 
 
 
 
 
 
 
 
 
 
 
 
 
Money market funds
$
30,286

 
$

 
$

 
$
30,286

 
$
30,286

 
$

 
$

Municipal bonds
3,070

 

 

 
3,070

 

 
3,070

 

 
$
33,356

 
$

 
$

 
$
33,356

 
$
30,286

 
$
3,070

 
$

Short-term investments:
 
 
 
 
 
 
 
 
 
 
 
 
 
Commercial paper
$
4,296

 
$

 
$
(3
)
 
$
4,293

 
$

 
$
4,293

 
$

Corporate bonds
10,856

 

 
(13
)
 
10,843

 

 
10,843

 

Equity securities
123

 

 
(78
)
 
45

 
45

 

 

Municipal bonds
55,723

 

 
(65
)
 
55,658

 

 
55,658

 

U.S. government and agency securities
20,033

 
9

 
(4
)
 
20,038

 
20,038

 

 

 
$
91,031

 
$
9

 
$
(163
)
 
$
90,877

 
$
20,083

 
$
70,794

 
$


The Company's financial investments are generally classified as available-for-sale. Available-for-sale securities are reported at fair value, with unrealized gains and losses, net of tax, included as a separate component of stockholders’ equity within accumulated other comprehensive loss. Realized gains and losses on these securities are included in other income (expense), net in the Company’s condensed consolidated statements of operations and have not been material for all periods presented.

As of June 30, 2017 and December 31, 2016 , approximately 100% and 96% , respectively, of the Company's marketable security investments mature within one year and nil and 4% , respectively, mature within one to five years. As of June 30, 2017 , no individual securities incurred continuous unrealized losses for greater than 12 months .

8


5.
Patent Assets, Net
Patent assets, net, consisted of the following (in thousands):
 
December 31,
2016
 
Additions
 
Disposals
 
June 30,
2017
Patent assets
$
932,283

 
$
41,585

 
$
(1,409
)
 
$
972,459

Accumulated amortization
(719,284
)
 
(79,566
)
 
1,400

 
(797,450
)
Patent assets, net
$
212,999

 
 
 
 
 
$
175,009


The Company’s acquired patent assets relate to technologies used or supplied by companies in a variety of market sectors, including consumer electronics, e-commerce, financial services, media distribution, mobile communications, networking, semiconductors, and software. The Company amortizes each acquired patent asset portfolio on a straight-line basis over its estimated economic useful life. As of June 30, 2017 , the estimated economic useful lives of the Company’s patent assets generally ranged from 24 to 60 months . As of June 30, 2017 , the weighted-average estimated economic useful life at the time of acquisition of all patent assets acquired since the Company’s inception was 40 months . Patent assets acquired during the six months ended June 30, 2017 had a weighted-average estimated economic useful life at the time of acquisition of 23 months .

As of June 30, 2017 , the Company expects amortization expense in future periods to be as follows (in thousands):
2017 (remainder)
$
68,903

2018
78,204

2019
24,234

2020
3,668

Total estimated future amortization expense
$
175,009


Amortization expense related to the Company's patent assets was $39.8 million and $37.7 million for the three months ended June 30, 2017 and 2016 , respectively, and $79.6 million and $79.5 million for the six months ended June 30, 2017 and 2016 , respectively.
6.
Property and Equipment, Net
Property and equipment, net, consisted of the following (in thousands):
 
June 30,
2017
 
December 31,
2016
Internal-use software
$
8,291

 
$
7,827

Leasehold improvements
2,169

 
2,169

Computer, equipment and software
5,854

 
5,204

Furniture and fixtures
935

 
935

Construction-in-progress
44

 
183

Total property and equipment, gross
17,293

 
16,318

Less: Accumulated depreciation and amortization
(10,999
)
 
(9,370
)
Total property and equipment, net
$
6,294

 
$
6,948


Depreciation and amortization expense related to the Company's property and equipment was $0.8 million for each three month period ended June 30, 2017 and 2016 , and $1.6 million and $1.4 million for the six months ended June 30, 2017 and 2016 , respectively.

9


7.
Business Combinations
On January 22, 2016, the Company completed its acquisition of all of the issued and outstanding shares of Inventus, to expand into the litigation discovery services market. The final purchase price for Inventus was approximately $232.0 million , net of working capital adjustments, which the Company paid in January 2016. The following table summarizes the cash paid and the estimated fair values of the assets and the liabilities assumed (in thousands) and the estimated useful lives of the acquired identifiable intangible assets:
 
Estimated Fair Value
 
Estimated Useful Life
Current assets
$
19,357

 
 
Intangible assets:
 
 
 
Customer relationships
58,000

 
9 - 10 years
Trademarks
3,200

 
1 - 6 years
Developed technology
6,400

 
3 years
Goodwill
145,984

 
 
Property, plant, equipment and other long-term assets
3,347

 
 
Deferred tax asset
10,595

 
 
Current liabilities
(7,280
)
 
 
Deferred tax liability
(5,477
)
 
 
Other long-term liabilities
(826
)
 
 
Cash purchase consideration paid
$
233,300

 
 

The intangible assets acquired are amortized on a straight-line basis which reflects the pattern in which the economic benefits of the intangible assets are expected to be utilized. The goodwill recorded is primarily attributable to the Company's opportunity to expand into the litigation discovery services market and is not deductible for tax purposes. For the six months ended June 30, 2016 , the Company recorded acquisition-related costs of $1.2 million which were expensed as incurred and included in selling, general and administrative expenses in the Company's condensed consolidated statements of operations. The Company has included the following financial results of Inventus in its condensed consolidated financial statements (in thousands):

 
Three Months Ended June 30,
 
Six Months Ended June 30,
 
2017
 
2016
 
2017
 
2016
Discovery Services
 
 
 
 
 
 
 
Revenue
$
18,819

 
$
19,258

 
$
36,845

 
$
29,836

Cost of revenue
10,187

 
9,920

 
20,045

 
14,954

Selling, general and administrative expenses
6,482

 
6,301

 
13,169

 
11,262

Operating income
$
2,150

 
$
3,037

 
$
3,631

 
$
3,620



10


The unaudited pro forma financial information in the table below summarizes the combined results of operations for the Company and Inventus as though the companies had been consolidated as of January 1, 2015, and includes the accounting effects resulting from the acquisition including amortization charges from the acquired intangible assets, $13.5 million of transaction costs incurred which were directly attributable to the acquisition of Inventus, and elimination of interest expenses and debt issuance and extinguishment costs associated with Inventus's historical debt which was extinguished upon the Company's acquisition of Inventus. This unaudited pro forma information also adjusts for Inventus's acquisition of London-based Unified OS Limited and certain of its affiliates as well as certain assets of Kooby LLP (collectively, "Unified") as though it had been consolidated as of January 1, 2015. These accounting effects do not have any impact on the Company's 2017 financial information. The following unaudited pro forma financial information is for information purposes only and is not necessarily indicative of the results of operations that would have been achieved if the acquisition had taken place as of January 1, 2015 (in thousands, except per share data):
 
Three Months Ended June 30,
 
Six Months Ended June 30,
 
2016
 
2016
Revenue
$
83,109

 
$
165,784

Net income
$
4,150

 
8,976

Basic net income per share
$
0.08

 
0.17

Diluted net income per share
$
0.08

 
0.17

8.
Goodwill
The changes in the carrying amounts of goodwill by operating segment were as follows (in thousands):
 
Patent Risk Management
 
Discovery Services
 
Total
Balance as of December 31, 2016
$
19,978

 
$
131,344

 
$
151,322

Foreign currency translation adjustments

 
5,015

 
5,015

Balance as of June 30, 2017
$
19,978

 
$
136,359

 
$
156,337


The Company reviews goodwill for impairment at least annually or more frequently if events or changes in circumstances
indicate that the carrying value of goodwill may not be recoverable. As of June 30, 2017 , no impairment of goodwill had been
identified.
9.
Intangible Assets, Net
Intangible assets, net, consisted of the following (in thousands):
 
June 30, 2017
 
December 31, 2016
 
Weighted-average Life (years)
 
Carrying Amount
 
Accumulated Amortization
 
Net Carrying Amount
 
Carrying Amount
 
Accumulated Amortization
 
Net Carrying Amount
Covenant not to compete
3.0
 
$

 
$

 
$

 
$
1,900

 
$
(1,604
)
 
$
296

Proprietary data and models
3.7
 
2,100

 
(2,100
)
 

 
2,100

 
(2,006
)
 
94

Customer relationships
9.3
 
56,860

 
(9,599
)
 
47,261

 
55,719

 
(6,323
)
 
49,396

Trademarks
4.9
 
4,893

 
(2,698
)
 
2,195

 
4,879

 
(2,439
)
 
2,440

Developed technology
3.0
 
6,048

 
(2,986
)
 
3,062

 
5,802

 
(1,978
)
 
3,824

 
 
 
$
69,901

 
$
(17,383
)
 
$
52,518

 
$
70,400

 
$
(14,350
)
 
$
56,050



11


As of June 30, 2017 , the Company expects amortization expense in future periods to be as follows (in thousands):
2017 (remainder)
$
4,206

2018
8,412

2019
6,552

2020
6,435

2021
6,435

Thereafter
20,478

Total estimated future amortization expense
$
52,518


Amortization expense related to the Company's intangible assets was $2.3 million and $2.6 million for the three months ended June 30, 2017 and 2016 , respectively, and $4.7 million and $4.8 million for the six months ended June 30, 2017 and 2016 , respectively.
10.
Accrued Liabilities
Accrued liabilities consisted of the following (in thousands):
 
June 30,
2017
 
December 31,
2016
Accrued payroll-related expenses
$
7,643

 
$
11,516

Accrued expenses
6,262

 
5,282

Total accrued liabilities
$
13,905

 
$
16,798

11.
Debt
On February 26, 2016, the Company entered into a Credit Agreement (the "Credit Agreement") which provided for a $100 million five -year term facility (the "Term Facility") and a $50 million five -year revolving credit facility (the "Revolving Credit Facility"), which remains undrawn as of June 30, 2017 . The Term Facility bears interest which is payable quarterly in arrears at the Company's option equal to either a base rate plus a margin ranging from 1.25% to 1.75% per annum or, at the Company's election, the one-, two-, three-, or six-month London interbank offered rate ("LIBOR") plus a margin ranging from 2.25% to 2.75% per annum, based upon the ratio of the Company's debt to consolidated EBITDA ratio. The outstanding balance on the Term Facility bore interest during the six months ended June 30, 2017 at an average interest rate of 3.4% , which approximates fair value. The Revolving Credit Facility bears a commitment fee on undrawn balances of 0.35% to 0.45% per annum, also based upon the Company's debt to consolidated adjusted EBITDA ratio, that is expensed as incurred. The Credit Agreement contains financial covenants requiring the Company to maintain certain leverage and fixed charge ratios. The Company is compliant with these covenants as of June 30, 2017 . The Credit Agreement also includes limitations on the Company's debt incurrence, dividend payments, and disposal activities.

As of June 30, 2017 , the Term Facility requires principal repayments in accordance with the following schedule (in thousands):
2017 (remainder)
 
$
3,750

2018
 
9,375

2019
 
11,875

2020
 
18,125

2021
 
50,000

Long-term debt, gross
 
93,125

Unamortized debt issuance costs
 
(1,466
)
Long-term debt, net
 
$
91,659

 
 
 
Reported as:
 
 
Current portion of long-term debt
 
$
7,724

Long-term debt, less current portion
 
83,935

Total
 
$
91,659


12


12.
Commitments and Contingencies
Commitments
The Company generally does not enter into long-term minimum purchase commitments. Its principal long-term commitments consist of obligations under operating leases for office space. In June 2017, the Company executed an amendment to its operating lease for its corporate headquarters in San Francisco. In accordance with the amendment, effective August 2017, the Company will reduce its leased space by approximately 18,000 square feet of the approximately 67,000 square feet of total previously leased space, which will reduce the Company's future operating lease commitments by approximately $2.4 million over the remaining lease term. Other than this change to the Company's lease obligation for its corporate headquarters, there were no material changes to the Company’s contractual obligations or commitments during the  six  months ended  June 30, 2017  as compared to those presented under the heading “Commitments and Contingencies” in Note 12 of the Notes to Consolidated Financial Statements in Part II, Item 8 of the Company’s Annual Report on Form 10-K filed with the SEC on February 28, 2017.

The following table summarizes rent expense related to non-cancelable operating leases (in millions):
 
Three Months Ended June 30,
 
Six Months Ended June 30,
 
2017
 
2016
 
2017
 
2016
Rent expense
$
1.6

 
$
1.4

 
$
3.2

 
$
2.8

Sublease income
(0.3
)
 
(0.2
)
 
(0.6
)
 
(0.4
)
Rent expense, net of sublease income
$
1.3

 
$
1.2

 
$
2.6

 
$
2.4


Litigation
From time to time, the Company may be a party to various litigation claims in the normal course of business. Legal fees and other costs associated with such actions are expensed as incurred. The Company assesses, in conjunction with its legal counsel, the need to record a liability for litigation or contingencies. A liability is recorded when and if it is determined that such a liability for litigation or contingencies is both probable and reasonably estimable. No liability for litigation or contingencies was recorded as of June 30, 2017 or December 31, 2016 .

In April 2016, Sourceprose Corporation filed a complaint in the U.S. District Court for the Western District of Texas against the Company alleging breach of an agreement with the plaintiff to purchase certain patent assets and breach of a non-disclosure agreement with plaintiff.  In July 2016, the Court transferred the litigation to the U.S. District Court for the Northern District of California. In November 2016, the Company moved to dismiss the claims of breach of an assignment of patents. In January 2017, the U.S. District Court for the Northern District of California dismissed the claims of breach of a patent assignment without prejudice, and allowed the plaintiff to file an amended complaint. The plaintiff filed an amended complaint in February 2017, alleging breach of a non-disclosure agreement, breach of an agreement to assign patents and a breach of a settlement agreement. In March 2017, the Company moved to dismiss all of the plaintiff’s claims, and the court granted-in-part and denied-in-part the motion, allowing the plaintiff leave to amend the complaint. The plaintiff filed a third amended complaint in May 2017, again alleging breach of an agreement with the plaintiff to purchase certain patent assets and breach of a non-disclosure agreement. RPX answered the third amended complaint in June 2017, and the case is proceeding to the discovery phase. The plaintiff seeks monetary damages and specific enforcement of the alleged purchase agreement. The Company is not currently able to determine whether there is a reasonable possibility that a loss has been incurred, nor can we estimate the potential loss or range of the potential loss that may result from this litigation. The Company is not currently able to determine whether there is a reasonable possibility that a loss has been incurred, nor can we estimate the potential loss or range of the potential loss that may result from this litigation.

In June 2013, Kevin O’Halloran, as Trustee of the Liquidating Trust of Tectonics, Inc. (the “Debtor”), filed a complaint in the U.S. Bankruptcy Court for the Middle District of Florida against the Company and Harris Corporation (the “Defendants”). The complaint alleges that the Defendants are liable under federal and state bankruptcy law regarding fraudulent transfers for the value of a patent portfolio purchased by the Company from Harris Corporation pursuant to an agreement entered into in January 2009, and within four years of the date the Debtor filed its petition in bankruptcy. In February 2015, the Court held a trial and in November 2015 entered judgment in favor of the Defendants. In December 2015, the Debtor filed an appeal of the judgment to the U.S. District Court for the Middle District of Florida. In August 2016, the District Court affirmed the judgment in favor of the Defendants. In September 2016, the Debtor filed an appeal of the judgment to the U.S. Court of Appeals for the Eleventh Circuit. The appellate briefing was completed in January 2017, and the parties are currently awaiting scheduling of oral argument. The Company is not currently able to determine whether there is a reasonable possibility that a loss has been incurred, nor can it estimate the potential loss or range of the potential loss that may result from this litigation.

In March 2012, Cascades Computer Innovations LLC filed a complaint in U.S. District Court for the Northern District of California (the “Court”) against the Company and five of its clients (collectively the “Defendants”). The complaint alleges that the

13


Defendants violated federal antitrust law, California antitrust law and California unfair competition law. The complaint further alleges that after the Company terminated its negotiations with the plaintiff to license certain patents held by the plaintiff, the Defendants violated the law by jointly refusing to negotiate or accept licenses under the plaintiff’s patents. The plaintiff seeks unspecified monetary damages and injunctive relief. In January 2013, the Court dismissed the complaint against the Defendants and granted the plaintiff leave to amend its complaint. In February 2013, the plaintiff filed an amended lawsuit alleging that the Defendants violated federal antitrust law, California antitrust law and California unfair competition law. In April 2016, the Court entered a final judgment in favor of the Defendants on all the plaintiff's claims. In April 2016, the plaintiff filed an appeal of the judgment. The appellate briefing was completed in November 2016, and the parties are currently awaiting the scheduling of oral argument. The Company is not currently able to determine whether there is a reasonable possibility that a loss has been incurred, nor can it estimate the potential loss or range of the potential loss that may result from this litigation.

Guarantees and Indemnifications
The Company has, in connection with the sale of patent assets, agreed to indemnify and hold harmless the buyer of such patent assets for losses resulting from breaches of representations and warranties made by the Company. The terms of these indemnification agreements are generally perpetual. The maximum amount of potential future indemnification is unlimited. To date, the Company has not paid any amount to settle claims or defend lawsuits. The Company is unable to reasonably estimate the maximum amount that could be payable under these arrangements since these obligations are not capped but are conditional to the unique facts and circumstances involved. No liability was recorded for these agreements as of June 30, 2017 or December 31, 2016 . The Company has no reason to believe that there is any material liability related to such indemnification provisions. The Company does not indemnify its clients for patent infringement.

As part of the Company's discovery services offering, the Company generally warrants that it will perform the services in good faith and in a timely and professional manner, and that it will exercise the same level of professional care commonly found in the industry. Additionally, the Company has agreed to provisions for indemnifying customers against liabilities if its discovery services infringe a third party’s intellectual property rights or if it breaches agreed privacy, security and/or confidentiality obligations. To date, the Company has not incurred any material costs, and it has not accrued any liabilities in the accompanying condensed consolidated financial statements, as a result of these obligations. The Company also enters into service-level agreements with its discovery services clients that specify required levels of application uptime and may permit customers to receive credits or to terminate their agreements in the event that the Company fails to meet required performance levels. To date, the Company has not experienced any significant failures to meet defined levels of performance and, as a result, has not accrued any liabilities related to these agreements in its condensed consolidated financial statements.

In accordance with its amended and restated bylaws, the Company also indemnifies certain officers and employees for losses incurred in connection with actions, suits, or proceedings threatened or brought against such officer or employee arising from his or her service to the Company as an officer or employee, subject to certain limitations. The term of the indemnification period is indefinite. The maximum amount of potential future indemnification is unspecified. The Company has no reason to believe that there is any material liability for actions, events, or occurrences that have occurred to date.

Reserves for Known and Incurred but not Reported Claims
The Company offers patent litigation insurance that covers certain costs associated with patent infringement lawsuits, and it assumes a portion of the underwriting risk on these insurance policies that it issues on behalf of a Lloyd's of London underwriting syndicate. As of June 30, 2017 and December 31, 2016 , the Company recorded a reserve of $1.4 million and $0.9 million , respectively, for known and incurred but not reported claims that represent estimated claim costs and related expenses for the policies underwritten and its portion of the underwriting risk on policies that the Company issued on behalf of the Lloyd's of London underwriting syndicate. The Company regularly reviews loss reserves using a variety of actuarial techniques and updates them as its loss experience develops.

14


13.
Stockholders’ Equity
Equity Plans
A summary of the Company’s activity under its equity-settled award plans and related information is as follows (in thousands, except per share data):
 
 
 
Options Outstanding
 
Shares Available for Grant
 
Number of Shares
 
Weighted-average Exercise Price
 
Weighted-average Remaining Contractual Life in Years
 
Aggregate Intrinsic Value
Balance - December 31, 2016
3,586

 
1,768

 
$
11.63

 
 
 
 
Shares authorized (1)
1,000

 

 

 
 
 
 
Options exercised

 
(673
)
 
8.76

 
 
 
 
Options forfeited/canceled
76

 
(76
)
 
16.43

 
 
 
 
Restricted stock units granted
(1,888
)
 

 

 
 
 
 
Restricted stock units forfeited
868

 

 

 
 
 
 
Restricted stock units withheld related to net-share settlement of restricted stock units
262

 

 

 
 
 
 
Balance - June 30, 2017
3,904

 
1,019

 
13.17

 
3.8
 
$
2,751

Vested and exercisable - June 30, 2017
 
 
1,019

 
13.17

 
3.8
 
2,751

( 1) In the first quarter of 2017 , the Company reserved an additional 1.0 million shares of its common stock for future issuance under the 2011 Plan.

The aggregate intrinsic value of stock options exercised during the three months ended June 30, 2017 and 2016 was $2.0 million and $0.2 million , respectively, and $2.7 million and $0.4 million for stock options exercised during the six months ended June 30, 2017 and 2016 , respectively. The total grant date fair value of stock options vested during the three months ended June 30, 2017 and 2016 was nil and $0.5 million , respectively, and nil and $1.1 million for stock options vested during the six months ended June 30, 2017 and 2016 , respectively. As of June 30, 2017 , all options issued and outstanding are fully vested.

Restricted Stock Units
The summary of RSU activity, which includes performance-based restricted stock units (“PBRSUs”), is as follows (in thousands, except per share data):
 
 Number of Shares
 
Weighted-Average Grant Date Fair Value
 
Aggregate Intrinsic Value
Non-vested units - December 31, 2016
3,424

 
$
11.53

 
 
Granted
1,888

 
11.78

 
 
Vested
(747
)
 
12.01

 
 
Forfeited
(868
)
 
9.9

 
 
Non-vested units - June 30, 2017
3,697

 
11.90

 
$
51,571


The total grant date fair value of RSUs vested during the three months ended June 30, 2017 and 2016 was $5.1 million and $3.4 million , respectively, and $9.5 million and $6.2 million during the six months ended June 30, 2017 and 2016 , respectively.

In October 2013, the Board of Directors approved net-share settlement for tax withholdings on RSU vesting. During the six months ended June 30, 2017 , the Company withheld issuing 262,369 shares of its common stock based on the value of the RSUs on their vesting dates as determined by the Company’s closing common stock price. Total payments to taxing authorities for employees’ minimum tax obligations were $3.3 million for the six months ended June 30, 2017 , and were recorded as a reduction to additional paid-in capital and reflected as a financing activity within the condensed consolidated statements of cash flows. The net-share settlements reduced the number of shares that would have otherwise been issued on the vesting date and increased the number of shares reserved for future issuance under the 2011 Plan.


15


Stock-Based Compensation Related to Employees and Directors
The fair value of RSUs granted to employees and directors is measured by reference to the fair value of the underlying shares on the date of grant.

PBRSUs granted during the six months ended June 30, 2017 and 2016 contain service, performance, and/or market conditions that affect the quantity of awards that will vest. During the six months ended June 30, 2017 and 2016 , the Company granted 102,790 and 96,282 PBRSUs, respectively. The Company estimates the grant date fair value of PBRSUs which include market conditions using the Monte Carlo simulation model. The weighted-average assumptions used to estimate the fair value of PBRSUs with market conditions and the resulting fair values are as follows:
 
Three and Six Months Ended June 30,
 
2017
 
2016
Dividend yield
%
 
%
Risk-free rate
1.03
%
 
1.08
%
Expected volatility
32
%
 
38
%
Expected term - in years
1

 
4

Grant date fair value
$
11.95

 
$
6.28


Stock-based compensation expense related to stock options granted to employees and directors was nil and $0.4 million for the three months ended June 30, 2017 and 2016 , respectively, and nil and $0.8 million for the six months ended June 30, 2017 and 2016 , respectively. Stock-based compensation expense related to PBRSUs and RSUs granted to employees and directors was $4.3 million and $4.5 million for the three months ended June 30, 2017 and 2016 , respectively, and $7.0 million and $9.0 million for the six months ended June 30, 2017 and 2016 , respectively.

As of June 30, 2017 , there was $39.1 million of unrecognized compensation cost related to RSUs, including PBRSUs, which is expected to be recognized over a weighted-average period of 2.8 years. Future grants of equity awards will increase the amount of stock-based compensation expense to be recorded.

Stock Repurchase Program
On February 10, 2015, the Company announced that its Board of Directors had authorized a share repurchase program under which the Company is authorized to repurchase up to  $75.0 million  of its outstanding common stock with no expiration date from the date of authorization. In March 2016 and May 2016, the Company increased its share repurchase program by $25.0 million and $50.0 million , respectively, for a total amount authorized of $150.0 million . As of  June 30, 2017 , the Company repurchased $91.1 million of the outstanding common stock. Under the program, shares may be purchased in open market transactions, including through block purchases, through privately negotiated transactions, or pursuant to any trading plan that may be adopted in accordance with Rule 10b5-1 of the Securities Exchange Act of 1934, as amended (the "Exchange Act"). The share repurchase program does not have an expiration date and may be suspended, terminated, or modified at any time for any reason. The Company’s share repurchase program does not obligate it to acquire any specific number of shares. The Company repurchased shares of its common stock in the open market, which were retired upon repurchase. The purchase price for the repurchased shares is reflected as a reduction to common stock and retained earnings in the Company's condensed consolidated balance sheet. Share repurchase activity during the period presented was as follows (in thousands, except per share data):
 
Shares Repurchased
 
Average Price per Share
 
Value of Shares Repurchased
Cumulative repurchase activity as of December 31, 2016
7,917

 
$
10.90

 
$
86,276

Repurchase activity during the period
429

 
11.15

 
4,783

Cumulative repurchase activity as of June 30, 2017
8,346

 
$
10.91

 
$
91,059

14.
Income Taxes
The Company uses an estimated annual effective tax rate based upon a projection of its annual fiscal year results to measure the income tax benefit or expense recognized in each interim period. The Company’s effective tax rate, including the impact of discrete items, was  36% and 37% for the three months ended  June 30, 2017  and  2016 , respectively, and 37% and 38% for the six months ended June 30, 2017  and  2016 , respectively.


16


The Company's 2013 through 2016 tax periods remain open to examination by the Internal Revenue Service and the 2012 through 2016 tax periods remain open to examination by most state tax authorities. The Internal Revenue Service's examination of Inventus's federal income tax return for fiscal year 2013 was closed during the three months ended March 31, 2017 with no material adjustments. The Company's 2015 through 2016 tax periods remain open to examination in the United Kingdom.
15.
Related-Party Transactions
During each of the three and six month periods ended June 30, 2017 and 2016 , four members of the Company’s Board of Directors also served on the boards of directors of RPX clients.

The Company recognized the following from these clients (in millions):
 
Three Months Ended June 30,
 
Six Months Ended June 30,
 
2017
 
2016
 
2017
 
2016
Revenue
$
2.8

 
$
2.5

 
$
5.8

 
$
4.8

Selling, general and administrative expenses
$
0.2

 
$
0.1

 
$
0.3

 
$
0.2


As of June 30, 2017 and December 31, 2016 , there were $0.3 million and $1.3 million receivables, respectively, due from these clients.
16.
Segment Reporting
Operating segments are components of an enterprise about which separate financial information is available. Operating segments are reported in a manner consistent with the internal reporting provided to the chief operating decision maker, or decision-making group, in deciding how to allocate resources and in assessing performance. The Company’s chief operating decision maker is its Chief Executive Officer. Prior to the acquisition of Inventus in January 2016, the Company’s Chief Executive Officer reviewed financial information presented on a consolidated basis and, as a result, the Company concluded that there was only one operating and reportable segment at that time. Subsequent to the acquisition of Inventus (see Note 7, Business Combinations), the Company's Chief Executive Officer reviews separate financial information for the patent risk management and discovery services businesses. Therefore, as of January 2016, the Company has two reportable segments: 1) patent risk management which generates its revenues primarily from membership subscriptions, premiums earned from insurance policies, and management fees for marketing, underwriting, and claim management and 2) discovery services which generates its revenues primarily from fees generated for data collection, hosting and processing, project management, and document review services. There are no material internal revenue transactions between these two reportable segments.

Although adjusted EBITDA is not a measure of financial performance determined in accordance with GAAP, the Company's chief operating decision maker evaluates segment financial performance by utilizing the segment's adjusted EBITDA because the Company believes it is a useful supplemental measure that reflects core operating performance and provides an indicator of the segment's ability to generate cash.

The Company defines adjusted EBITDA as net income exclusive of provision for income taxes, interest and other income (expense), net, stock-based compensation and related employer payroll taxes, depreciation, and amortization. There are limitations in using the Company's measures of financial performance that are not determined in accordance with GAAP and these may be different from other financial measures not determined in accordance with GAAP used by other companies. These financial measures are limited in value because they exclude certain items that may have a material impact on the Company's reported financial results. In addition, they are subject to inherent limitations as they reflect the exercise of judgment by the Company about which items are adjusted to calculate its financial measures not determined in accordance with GAAP. The presentation of financial measures not determined in accordance with GAAP should not be considered in isolation or as a substitute for, or superior to, financial results determined in accordance with GAAP.


17


Summarized financial information by segment utilized by the Company's chief operating decision maker is as follows (in thousands):
 
Three Months Ended June 30,
 
Six Months Ended June 30,
 
2017
 
2016
 
2017
 
2016
 
 
 
 
 
 
 
 
Patent Risk Management
 
 
 
 
 
 
 
Revenue
$
61,615

 
$
63,851

 
$
126,101

 
$
133,008

Cost of revenue
40,955

 
39,150

 
82,395

 
81,782

Selling, general and administrative expenses
16,642

 
19,603

 
31,076

 
41,537

Operating income
4,018

 
5,098

 
12,630

 
9,689

Stock-based compensation, including related taxes
4,092

 
4,835

 
6,533

 
9,769

Depreciation and amortization
40,485

 
38,519

 
80,994

 
81,176

Adjusted EBITDA
$
48,595

 
$
48,452

 
$
100,157

 
$
100,634

 
 
 
 
 
 
 
 
Discovery Services
 
 
 
 
 
 
 
Revenue
$
18,819

 
$
19,258

 
$
36,845

 
$
29,836

Cost of revenue
10,187

 
9,920

 
20,045

 
14,954

Selling, general and administrative expenses
6,482

 
6,301

 
13,169

 
11,262

Operating income
2,150

 
3,037

 
3,631

 
3,620

Stock-based compensation, including related taxes
387

 
141

 
821

 
229

Depreciation and amortization
2,441

 
2,511

 
4,861

 
4,409

Adjusted EBITDA
$
4,978

 
$
5,689

 
$
9,313

 
$
8,258

 
 
 
 
 
 
 
 
Consolidated
 
 
 
 
 
 
 
Revenue
$
80,434

 
$
83,109

 
$
162,946

 
$
162,844

Cost of revenue
51,142

 
49,070

 
102,440

 
96,736

Selling, general and administrative expenses
23,124

 
25,904

 
44,245

 
52,799

Operating income
$
6,168

 
$
8,135

 
$
16,261

 
$
13,309


The following table reconciles the Company's subtotal segment adjusted EBITDA to consolidated net income (in thousands):
 
Three Months Ended June 30,
 
Six Months Ended June 30,
 
2017
 
2016
 
2017
 
2016
 
 
 
 
 
 
 
 
Subtotal segment adjusted EBITDA
$
53,573

 
$
54,141

 
$
109,470

 
$
108,892

Depreciation and amortization
(42,926
)
 
(41,030
)
 
(85,855
)
 
(85,585
)
Stock-based compensation, including related taxes
(4,479
)
 
(4,976
)
 
(7,354
)
 
(9,998
)
Interest and other income (expense), net
427

 
(1,549
)
 
(106
)
 
256

Provision for income taxes
(2,403
)
 
(2,436
)
 
(5,970
)
 
(5,178
)
Net income
$
4,192

 
$
4,150

 
$
10,185

 
$
8,387


The following table summarizes the Company's total assets by segment (in thousands):
 
June 30,
2017
 
December 31,
2016
Patent risk management
$
491,364

 
$
501,540

Discovery services (1)
242,272

 
233,749

Total assets
$
733,636

 
$
735,289

(1) Includes goodwill and intangible assets acquired through the Company's acquisition of Inventus in January 2016.

18



The Company markets its solutions to companies around the world. Revenue is attributed to geographic areas based on the country in which the client is domiciled. The following table presents revenue by location and revenue generated by country as a percentage of total revenue for the applicable period, for countries representing 10% or more of revenues for one or more of the periods presented (dollars in thousands):
 
Three Months Ended June 30,
 
Six Months Ended June 30,
 
2017
 
2016
 
2017
 
2016
United States
$
48,425

 
60
%
 
$
47,127

 
57
%
 
$
96,666

 
59
%
 
$
94,652

 
58
%
Japan
8,226

 
10

 
8,908

 
11

 
17,640

 
11

 
17,913

 
11

Rest of world
23,783

 
30

 
27,074

 
32

 
48,640

 
30

 
50,279

 
31

Total revenue
$
80,434

 
100
%
 
$
83,109

 
100
%
 
$
162,946

 
100
%
 
$
162,844

 
100
%

19


Item 2.
Management’s Discussion and Analysis of Financial Condition and Results of Operations.
The following discussion and analysis of our financial condition and results of operations should be read in conjunction with our condensed consolidated financial statements and related notes appearing elsewhere in this Quarterly Report on Form 10-Q and our Annual Report on Form 10-K filed with the Securities and Exchange Commission (“SEC”) on February 28, 2017.

This Quarterly Report on Form 10-Q contains “forward-looking statements” that involve risks and uncertainties, as well as assumptions that, if they never materialize or prove incorrect, could cause our results to differ materially from those expressed or implied by such forward-looking statements. The statements contained in this Quarterly Report on Form 10-Q that are not purely historical are forward-looking statements within the meaning of Section 27A of the Securities Act of 1933, as amended, and Section 21E of the Exchange Act. Forward-looking statements are often identified by the use of words such as, but not limited to, “anticipate,” “believe,” “can,” “continue,” “could,” “estimate,” “expect,” “intend,” “may,” “will,” “plan,” “project,” “seek,” “should,” “target,” “will,” “would,” and similar expressions or variations intended to identify forward-looking statements. Forward-looking statements include statements regarding our business strategies and business model, products, benefits to our clients, future financial results and expenses, patent acquisition spending, our acquisition of Inventus, and our competitive position. These statements are based on the beliefs and assumptions of our management based on information that is currently available. Such forward-looking statements are subject to risks, uncertainties, and other important factors that could cause actual results and the timing of certain events to differ materially from future results expressed or implied by such forward-looking statements. Factors that could cause or contribute to such differences include but are not limited to those identified below and those discussed in the section titled “Risk Factors” included in Part II, Item 1A of this Quarterly Report on Form 10-Q and elsewhere in this filing and our Annual Report on Form 10-K filed with the SEC on February 28, 2017. Furthermore, such forward-looking statements speak only as of the date of this report. Except as required by law, we undertake no obligation to update any forward-looking statements to reflect events or circumstances after the date of such statements.
Overview
Since our founding in 2008, we have been providing an alternative to litigation through our patent risk management services. In January 2016, through our acquisition of Inventus, we began offering technology-enabled discovery services to our clients.

We help companies reduce patent-related risk and corporate legal expense by providing two primary service offerings: (1) a subscription-based patent risk management service offering that facilitates more efficient exchanges of value between owners and users of patents compared to transactions driven by actual or threatened litigation, and (2) a discovery services offering.

Patent Risk Management
We serve as a trusted intermediary in the patent marketplace. Our business model aligns our interests with those of our clients, with whom we have developed trusted relationships. Our patent risk management services clients include companies that design, make, or sell technology-based products and services as well as companies that use technology in their businesses, and which face legal claims for patent infringement. We have not asserted and will not assert our patents. We have never initiated patent infringement litigation, and our clients receive guarantees that we will never assert patents against them. We consider this guarantee to be of paramount importance in establishing trust with our clients. In a market with limited publicly available data on pricing and terms of licenses and litigation settlement, we believe our data and market intelligence is a valuable resource for our clients and prospects. In exchange for an upfront annual subscription fee, we provide the following to our patent risk management clients throughout the duration of their membership:
the review and analysis of patents offered for sale, including analysis of patent quality, validity, and commercial significance;
defensive patent acquisition, through which we acquire patents and patent rights on behalf of all of our patent risk management clients;
facilitation of syndicated transactions;
prior art searches;
proprietary periodic analysis and publication of patent market trends;
the tracking of all US patent applications and issuances, patent litigation activity, and associated parties; and
publication and provision of patent-related data to governmental and regulatory bodies to inform public policy discussion about patent reform and trends.

Access to these services is available primarily through discussions with our professionals—particularly client relations and our team of patent experts, as well as through a proprietary database, and attendance at periodic conferences.

Insuring against the costs of patent infringement litigation is a natural extension of our patent risk management membership. Our patent infringement litigation expense insurance is a liability insurance policy that covers certain costs associated with patent infringement lawsuits. We assume some portion of the underwriting risk on the insurance policies that we issue on behalf of a Lloyd's

20

Table of Contents

of London underwriting syndicate. To date, the effect of the insurance policies that we have issued or assumed through our reinsurance business has not been material to our results of operations or financial condition.

In our defensive patent acquisition activities, we acquire patents, licenses to patents, patent rights and agreements for covenants not to sue, which we collectively refer to as “patent assets.” We measure patent asset acquisition spend on both a “gross” and a “net” basis, whereby the “gross spend” represents the aggregate amount spent including amounts contributed by our clients in syndicated acquisitions above and beyond their subscription fees and the “net spend” represents only the net incremental investment of our own capital. From our inception through June 30, 2017 , we have reviewed over 8,900 patent asset portfolios, completed 413 acquisitions of patent asset portfolios with gross and net patent acquisition spend of $2.3 billion and $989.0 million , respectively. During the six months ended June 30, 2017 , we completed 28 acquisitions of patent assets and our gross and net patent acquisition spend totaled $73.3 million and $41.6 million , respectively.

During the six months ended June 30, 2017 and 2016 , revenue from our patent risk management services was $126.1 million and $133.0 million , respectively. As of June 30, 2017 , our patent risk management segment had more than 320 clients, consisting of our patent risk management network members and insurance clients. We provide patent risk management services to more than 400 companies, including those insured under policies sold to venture funds and industry trade associations.

Discovery Services
Through our wholly owned subsidiary Inventus, in 2016 we began offering technology-enabled discovery services to assist law firms and corporate legal departments manage costs and risks related to the litigation discovery process. Our discovery service offering focuses on the process of consolidation and organization of data into meaningful discovery information powered by a mix of third-party and proprietary software. This allows our discovery services clients to efficiently and effectively manage a portfolio of litigation discovery matters in a central location.

Our more than 1,000 discovery services clients in approximately a dozen countries benefit from our discovery services, which include data hosting and backup, data processing and collection, project management, document review, and traditional document production. All of these services are designed to streamline the administration of litigation, investigations, and regulatory compliance. During the six months ended June 30, 2017 and 2016 , revenue from our discovery services was $36.8 million and $29.8 million , respectively. Certain of our discovery services operations are denominated in currencies other than the U.S. dollar, primarily the British pound sterling and the Euro, and therefore these operations are exposed to foreign exchange rate fluctuations.
Key Components of Results of Operations
Revenue
Subscription revenue includes membership subscriptions to our patent risk management services, premiums earned, net of ceding commissions, from insurance policies, and management fees related to our insurance business. Historically, the majority of our revenue has consisted of fees paid by our clients under subscription agreements. Subscription revenue will be positively or negatively impacted by the financial performance of our patent risk management clients since their subscription fees typically reset annually based upon their most recently reported annual financial results. In August 2012, we launched our insurance product and started to recognize insurance premium revenue from the insurance policies that we underwrite. As the primary insurer, we had been recognizing the full insurance premium as revenue. In May 2014, we began to assume a portion of the underwriting risk on insurance policies that we issue on behalf of a Lloyd's of London underwriting syndicate, and as a result we recognize only the portion of the underwriting risk that we assume. In addition, we receive management fees for marketing, underwriting, and claims management services. Although we expect this revenue to increase as we sell more insurance policies in the future, to date, insurance premium revenue has not been material to our results of operations.

We recognize revenue from the sale of licenses and advisory fee income in connection with syndicated acquisitions through our patent risk management services, which we collectively refer to as fee-related revenue. In the future, we may receive other revenue and fee income from newly-introduced products and services. Our fee-related revenue may fluctuate significantly from period to period.

Discovery revenue represents fees generated from services rendered in connection with our discovery services. These services are typically comprised of document collection and processing, document review, document production, and project management, and are generally billed in arrears based on the number of users, amount of data processed and stored, or number of consulting hours. Our discovery revenue may fluctuate significantly based on the project-oriented nature of the discovery services we provide.

We do not believe that our rate of growth since inception is representative of anticipated future revenue growth and we may experience a year-over-year decline in revenue in future periods.


21

Table of Contents

Cost of Revenue
Cost of revenue from our patent risk management services primarily consists of amortization expenses related to acquired patent assets. Acquired patent assets are capitalized and amortized ratably over their estimated useful lives, which typically relates to the anticipated cash flows from clients and prospects that will benefit from the transaction. Also included in the cost of revenue from our patent risk management service are expenses incurred to maintain our patents, prosecute our patent applications, conduct inter partes reviews and prior art searches, and amortization expense for acquired intangible assets and internally developed software. With the launch of our insurance offering in August 2012, cost of revenue from our patent risk management services began to include premiums ceded to reinsurers, loss reserves, and the costs of insurance claims paid to our insurance clients. We began to issue new policies under a reinsurance model in May 2014 and under this model we do not cede premiums.

Our cost of revenue from our patent risk management services is primarily driven by the amortization of previously acquired patent assets, which are typically amortized over an estimated useful life of 24 to 60 months. From time to time, we may acquire patent assets that are valuable to our clients and prospects with an estimated useful life that is significantly less than the historical weighted-average of patent assets previously acquired, resulting in increased patent asset amortization expense in periods immediately following the acquisition. Estimating the economic useful lives of our patent assets depends on various factors including whether we acquire patents or licenses to patents, and the remaining statutory life of the underlying patents, either of which could result in shorter amortization periods. We believe that amortization periods of patent assets to be acquired in future periods may be amortized over shorter periods than the historical weighted-average of 40 months , which may cause our cost of revenue to increase. Our cost of revenue from our patent risk management services may fluctuate in the future as it is dependent on the level of patent asset purchases, the amortization period of the patent assets we acquire, and the level of insurance policies we issue.
Cost of revenue from our discovery services primarily consists of compensation costs for employees and third-party contractors who deliver services to our clients, costs incurred to maintain, secure, and store hosted data, license fees for the software we utilize in our discovery services process, and amortization of our identifiable intangible assets for technology used to provide our discovery services to our clients. Our cost of revenue related to hosting and processing data and software license fees is primarily fixed but can fluctuate based on levels of data hosted and number of users our clients choose to have access to the software. Our cost of revenue related to document review services is primarily variable and may fluctuate significantly based on the review services provided to our clients.

Selling, General and Administrative Expenses
Selling, general and administrative expenses consist of salaries and related expenses, including stock-based compensation expense, amortization related to our intangible assets, cost of marketing programs, legal costs, professional fees, travel costs, facility costs, and other corporate expenses. We expect that in the foreseeable future, selling, general, and administrative expenses may decrease when compared to the prior year period as we seek to effectively manage expenses although such expenses could fluctuate from period to period.

Interest and Other Income (Expense), Net
Interest and other income (expense), net consists primarily of interest income earned on our cash, cash equivalents, and short-term investments, interest expense incurred on our term debt, gains or losses due to foreign currency fluctuations, as well as changes in fair value and gains on extinguishment of our deferred payment obligations. Our interest and other income (expense), net may fluctuate significantly as our long-term debt bears interest in line with the London interbank offered rate and our results of operations and cash flows are subject to fluctuations due to changes in foreign currency exchange rates, particularly changes in the British pound sterling, Japanese yen, and Euro relative to the U.S. dollar.

Provision for Income Taxes
Income taxes are computed using the asset and liability method, under which deferred tax assets and liabilities are determined based on the difference between the financial statements and tax basis of assets and liabilities using enacted tax rates in effect for the year in which the differences are expected to affect taxable income. Valuation allowances are established when necessary to reduce deferred tax assets to the amount expected to be realized.
Critical Accounting Policies and Estimates
Our condensed consolidated financial statements are prepared in accordance with accounting principles generally accepted in the United States of America. The preparation of these condensed consolidated financial statements requires us to make estimates and assumptions that affect the reported amounts of assets, liabilities, revenue, costs and expenses, and related disclosures.

There have been no material changes to our significant accounting policies during the six  months ended  June 30, 2017 , as compared to the significant accounting policies presented under the heading “Basis of Presentation and Significant Accounting

22

Table of Contents

Policies” in Note 2 of the Notes to Consolidated Financial Statements in Part II, Item 8 of our Annual Report on Form 10-K filed with the SEC on February 28, 2017.

In March 2016, the Financial Accounting Standards Board ("FASB") issued Accounting Standards Update ("ASU") No. 2016-09,  Compensation – Stock Compensation (Topic 718)  ("ASU 2016-09"). ASU 2016-09 identifies areas for simplification involving several aspects of accounting for share-based payment transactions, including the income tax consequences, classification of awards as either equity or liabilities, an option to recognize gross stock compensation expense with actual forfeitures recognized as they occur, as well as certain classifications on the statement of cash flows. The amendments in this update became effective in the first quarter of 2017. We adopted this standard on January 1, 2017 and the standard did not have a material impact on our consolidated financial statements.

Recent Accounting Pronouncements
Our recent accounting pronouncements are described in more detail in Note 2, "Basis of Presentation and Significant Accounting Policies," in Notes to Condensed Consolidated Financial Statements (unaudited) in Part I, Item 1 of this Quarterly Report on Form 10-Q.
Results of Operations
The following table sets forth our condensed consolidated statement of operations data for each of the periods indicated, including segment information (in thousands). Our historical results are not necessarily indicative of our results of operations to be expected for any future period.
 
 
Three Months Ended June 30,
 
Six Months Ended June 30,
 
 
2017
 
2016
 
2017
 
2016
Revenue
 
 
 
 
 
 
 
 
Patent risk management
 
$
61,615

 
$
63,851

 
$
126,101

 
$
133,008

Discovery services
 
18,819

 
19,258

 
36,845

 
29,836

Total revenue
 
80,434

 
83,109

 
162,946

 
162,844

Cost of revenue
 
 
 
 
 
 
 
 
Patent risk management
 
40,955

 
39,150

 
82,395

 
81,782

Discovery services
 
10,187

 
9,920

 
20,045

 
14,954

Total cost of revenue
 
51,142

 
49,070

 
102,440

 
96,736

Selling, general and administrative expenses
 
 
 
 
 
 
 
 
Patent risk management
 
16,642

 
19,603

 
31,076